Chapter 10.

Tests of Control
In this Chapter, we will cover;
1 The sales system
2 The purchases system
3 The inventory system
4 The bank and cash system
5 The payroll system
6 Revenue and capital expenditure

1
Controls in Sales System

They are based around;

Selling ( Authorisation)
Goods outward ( Custody)
Accounting (Recording)

2
Sales System
Take Document Make
order order order

Despatch
order
Chase
Payment Raise good
Despatch
note

Receive Despatch
Payment Invoice

Send Account Raise

Statement for invoice Invoice

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Sales System:
Assertion Control Objectives Controls Test of controls

1. Occurrence Recorded sales represent Sales are only recorded For a sample of invoices,
goods or service provided with approved sales examine if there are
order/despatch note shipping docs/sales order
and despatch note

2. Ensure all the sales made • Invoices and • Take a sample of

Completeness during the year are recorded despatch notes are despatch notes/sales
serially numbered order, trace invoices
• Examine if the Invoices
• Invoices are and Despatch notes are
matched to serially numbered.
despatch notes • review a sample of
reconciliation
performed

3. Accuracy • Ensure that sales figure • The arithmetical • Take a sample of sales
recorded in the FSs are accuracy of invoices invoices and examine
correct as to rate and are checked by an the arithmetical
quantity independent staff accuracy of them via
recalculating the invoice
• All adjustments are • Adjustments are value (qty vs rate)
journalised approved by an
authorised person • Examine Journal entries
for authorisation and
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approval
Sales System:
Assertion Control Objectives Controls Test of controls

4. Cut-off • To ensure that Daily invoicing of • Compare dates in the

transactions are recorded the goods invoices with that of
in the correct period shipped/despatched despatch note
All shipping
documents are • Compare dates in the
forwarded to the invoices with dates at
invoicing section on which GL entry done.
daily basis

5. • To ensure that all • Chart of accounts • Review docs for

Classification transactions are classified regularly reviewed updates to COAs
in accounts and updated

• Codes in place for • Test application

different types of controls for proper
services/products codes

5
Purchase System
Purchase system is based on;
Buying (authorisation)
 Goods inwards (custody)
Accounting (recording)

6
 Purchase system:
Assertion Control Controls Test of controls
Objectives

1. Occurrence To ensure that • A purchase order • Take a sample of

recorded is raised for every purchases from GL
purchases purchase. and trace the GRN
represent goods or and purchase order
service received
• purchases are • Take a sample of
authorised purchases made
from the GL and
inspect the purchase
orders for approval

• There is an • Take a sample of

approved GRN and trace them
purchase order to an approved PO
for every receipt
of goods

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 Purchase system:
Assertion Control Controls Test of controls
Objectives

2. Completeness Ensure all the • Purchase • Take a sample of

purchases made Invoices, GRN POs and GRN and
during the year and PO are vouch them to
are recorded matched Invoices

• Pre-numbered • Review the entity’s

GRN and procedures for
purchase order accounting for pre-
in use numbered
documents/ review
application
controls

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 Purchase system:
Assertion Control Controls Test of controls
Objectives

3. Accuracy • Ensure that • The arithmetical • Take a sample of

purchase figure accuracy of purchase invoices
recorded in the purchase and examine the
FSs are correct invoices are arithmetical
as to rate and checked by an accuracy of them
quantity independent via recalculating
staff the invoice value
(qty vs rate)

• All adjustments • Adjustments are • Examine Journal

are journalised approved by an entries for
authorised authorisation and
person approval

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 Purchase system:
Assertion Control Objectives Controls Test of controls
4. Cut-off • To ensure that • All goods received • Compare dates in the
transactions are reports are forwarded to invoices with that of GRN
recorded in the correct accounts payable dept
period daily • Compare dates in the
invoices with dates at which
• Procedures in place to GL entry done.
record accounts payable
as soon as goods are
received

5. Classification • To ensure that all • Chart of accounts • Review docs for updates to
transactions are regularly reviewed and COAs
classified in accounts updated
• Test application controls for
• Codes in place for proper codes
different types of
services/products

6. Rights and Obligation • To Ensure that recorded • PO and GRN are • Examine supporting
purchases represent matched with Suppliers document for sample of
liability and obligation Invoice invoices
of the entity

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Inventory System
Inventory controls are designed to ensure safe
custody. Such controls include restriction of access,
documentation and authorisation of movements,
regular independent inventory counting and
review of inventory condition.

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 Inventory
Assertion Control Objectives
1. existence • To ensure all inventories
recorded in the FS are
existing
2. Completeness • To ensure all purchases and
sale are recorded in the GL
3. Rights and Obligation • To Ensure inventory
recorded belong to the
entity
Controls
• Use of pre-numbered GDN
and GRN
• Reconciliation of inventory
records with the GL
• Segregation of duties
• Inventory count done on
regular basis
• Physical safeguards for
inventory
• Procedures for inventory
held in third parties exclude
consignments for third
parties
• Reconciliation of
accounting entries with
physical records
• Procedures in place to
include inventory held at
third parties and exclude
inventory held on
consignment for third
parties.
Test of controls
• Review documentation in use
• Review of sample reconciliation
performed by an independent
person
• Observe and evaluate proper
segregation of duties
• Sight existence of counting
sheets
• Physically inspect the safeguards
• Review procedures for including
inventories held at third parties.
• Review procedures consignment
inventory
• Review the independent
reconciliation performed.
• Review entity’s procedures for
consignment inventory
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 Inventory :
Assertion Control Objectives Controls Test of controls

4. Valuation • To ensure that • An acceptable • Consider acceptability of

inventory is valued accounting method has the stock valuation method
correctly in the FSs been chosen for used (eg; FIFO, Avco, Std
valuation of the costing)
inventory
• Examine the valuation of
• Proper entries/records stock by taking samples
for stock in/out and from stock ledger as to
balance maintained receipts, issuances and
balance.
• Perpetual or year-end • Review adjustments
stock take done brought to inventory in the
GL following stock take

5. Cut-off • To ensure that all • All despatches/issues • Take a sample of purchases

purchases and are recorded daily. and issuances shortly before
inventory are recorded and after the year end to
to the correct • All goods inwards are ensure that they are
accounting period in recorded daily recorded in the stock ledger
the GL to the correct accounting
• Reconciliation of period.
inventory records with
the GL • Review reconciliation
performed

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 Inventory
Assertion Control Objectives Controls Test of controls

6. Presentation and • To ensure that all • Order for materials and • Review entity’s procedures
Disclosure inventories are properly production data use used for classifying
identified and classed forms inventory
in the FSs
• Review working papers for
• Proper disclosure are • Approval by the Finance evidence of review
made in the FSs as to Director
classification and
valuation

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Bank and Cash System
Controls over bank and cash system should prevent
fraud

15
 Bank and Cash System : cash payments

Assertion Control Objectives Controls Test of controls

1. Occurrence • To ensure only • Segregation of • Observe and evaluate

valid cash duties segregation of duties
payments are made • Supply statements • Review procedures for
reconciled to reconciling supplier
payable records statements
• Monthly • Review reconciliation to
reconciliations confirm whether BR has
been carried out

2. Completeness • To ensure that all • Segregation of • Observe and evaluate

cash payments duties segregation of duties
occurred are
recorded • Supply statements • Review procedures for
reconciled to reconciling supplier
payable records statements

• Monthly • Review reconciliation to

reconciliations confirm whether BR has
been carried out

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Bank and Cash System : cash payments
Assertion Control Objectives Controls Test of controls

3.Accuracy/classification/ • Ensure that all cash • Reconciliation of daily • Review reconciliation, to

valuation payments are payment reports to ensure performed, reviewed
recorded correctly in electronic cash and any discrepancies
the ledger payments transfers and followed up on a timely
cheques basis.

• Supply statements • Review reconciliation for a

reconciled to payable sample of accounts
account regularly

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 Bank and Cash System : Cash payments
Assertion Control Objectives Controls Test of controls

4. Cut-off • To ensure that cash • Reconciliation of • Review Reconciliation and

payments are electronic funds check if it is carried out
recorded in the transfers and cheques regularly.
correct period issued with postings to
cash payments journal
and payable accounts.

5. Presentation and • To ensure that cash • Chart of accounts • Review cash payment
Disclosure payments are charged journal to assess
to the correct account • Independent review of reasonableness of charging
the GL account to accounts
assignment • Review assignment of
general ledger account.

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 Bank and Cash System : Cash receipts
Assertion Control Objectives Controls Test of controls
1. Occurrence • To ensure that all • Segregation of duties • Evaluate and observe
valid receipts are segregation of duties
received and posted • Monthly BRS and
independently reviewed • Review of BRS to confirm
performed and reviewed
• Use of cash registers or
point of sales • Observe cash sales
procedures
• Period review of cash
sales procedures • Inquire management of
results of inspections

2. Completeness • To ensure all cash • Segregation of duties • Review and observe

receipts are recorded segregation of duties
• Serial numbering of
cash receipts • Inspect the receipts for
serial numbering and
• Daily cash receipts breaks in the serial no(if
posting reconciled to any)
customer accounts • Take a sample of cash
receipts and vouch the
• Customer statements entries made in the
sent out on regular customer accounts
basis • Enquire the mgt of handling
of customer statements

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 Bank and Cash System : Cash receipts
Assertion Control Objectives Controls Test of controls

3.Accuracy/classification/ • Ensure cash receipts • Monthly bank • Review reconciliation and

valuation are recorded at reconciliation look for evidence of
correct amounts statements performed independent review
by an independent
• Ensure that they are person
posted to the correct • Review reconciliations
receivable account • Daily remittance
and to the GL report reconciled to
control listing of
advices ( i.e.: in case of
electronic transfer)

4. Cut-off • To ensure that cash • Daily remittances • Review reconciliation

receipts are recorded in reconciled to posting to
the correct accounting cash receipts journal
period. and customer accounts

• Monthly customer
statement sent out
• Bank reconciliation at
period-end.
• Review entities procedures
for sending out statements
• Review and test
reconciliations

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 Bank and Cash System : Cash receipts

Assertion Control Objectives Controls Test of controls

5. Presentation and • Cash receipts are • Review COA and its • Review any documentary
Disclosure charged to correct regular review for evidence of review
accounts appropriateness and
update where
necessary

• Codes in place for • Test application controls

different types of for proper codes.
receipts

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Payroll Systems
Key controls over payroll cover;
Documentation and authorisation of staff changes
Calculation of wages and salaries
Payment of wages
Authorisation of deductions

22
 Payroll System :
Assertion Control Objectives Controls Test of controls

1. Occurrence • To ensure that • Staff salary and wages • Ensure that staff are paid for
payroll expenditure are paid when they genuine work/time spent
represent salaries performed their
and wages for actual duty/spend time on
work done. work

2. Completeness • To ensure that payroll • Pre-numbered clock • Review sequential-

cost is recorded for card/fingertech in use numbering of clock cards
the work done and
payroll expenditure • Segregation of duties • observe and evaluate
for the whole proper segregation of
accounting period is • Regular reconciliation duties
accounted for of payroll records and
employee cost in the GL • Review reconciliations
• Preparation of • Sight evidence for
authorisation of authorisation and
cheques and bank preparation of cheques
transfers and bank transfer and
segregation of duties b/w
them.
• Examine list of bank
account no. of the staff for
salary transfers

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 Payroll System :
Assertion Control Objectives Controls Test of controls

3. Accuracy • To ensure the basic • Performance of an • Enquire the management of

pay, allowances and independent pay segregation of duties b/w
deductions are calculations salary computation and
calculated and independent review. Sight
adjusted for in payroll evidence for independent
correctly review.

• Ensure payroll Changes to master • Review reconciliation before

transactions are payroll reviewed before and after changes to master
correctly recorded in and after change payroll
GL

4. Classification To ensure basic pay • Review COA Review application controls in

various allowance and the Accounting system for
deductions are classified changes brought
under appropriate heads review and consider the
reasonableness of
classification in accounts

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 Payroll System :

Assertion Control Objectives Controls Test of controls

5. Cut-off • Ensure that payroll • All starter, leavers and • Review a sample of starters
transaction is changes to payroll are and leavers
accounted for in the brought to accounts
correct period promptly • Review entity’s
procedures for reporting
changes brought to the
payroll

6. Presentation and To ensure that payroll • Chart of accounts. • Review chart of

Disclosure transactions are • Independent approval accounts.
properly classified in and review of accounts
the financial charged to payroll. • Review procedures
statements. for classifying payroll costs.

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